Yesterday we started our mini-series on understanding credit by taking a look at the surface of the credit report – what it is, what’s contained on it, who has it, and who can see it. Today we’ll continue by taking a closer look at the most important information on that credit report – your credit score.
If your credit report is a snapshot of your financial health and wealth (as we stated yesterday,) then your credit score is a single sentence. Or rather, a single number. After the credit reporting agency (TransUnion or Equifax) has collected all the information and rated it, they will then calculate a number that is your credit score. Of course any new information regarding debts, credit, or payments will also go onto your credit report and will then ultimately affect your credit score.
Equifax and TransUnion both use a scale of 300 to 900 to determine your credit score; and the higher the number you have, the better your credit score is. Scores above 800 are considered to be the most desirable, while anything between 760 and 799 is good. The low 700s are thought to be fair, although some lenders may still decide you’re too big a risk; while anything below 699 is considered to be a bad score, given to someone with bad credit.
The way lenders see it, a person with a good credit score has obtained credit, used it wisely, and paid it off in full (or at least the minimum amount due) in a timely manner. Someone with a credit score of 760 would probably be most likely to get a loan or credit card, while someone with a score of 650 would not.
Of course, it’s more than just a simple matter of collecting debt and paying it off. The calculation of your credit score is an on-going process, and just about every financial decision you make could potentially affect it in a very big way. So what are the biggest factors that determine your credit score?
Your payment history is one of the biggest components that affects your credit score, and it’s one that most individuals think of. If you’ve missed a debt repayment, or several, in the past couple of years, it’s most likely still on your credit report and is still harming your credit score. Whether or not all unpaid debts appear on your credit history will depend on the type of debt they are, how long they’ve been on the report, and when the last date of payment was made. Of course, debts that you’ve paid off – even just a portion – will also be recorded on your credit report, and these will shine a better light on it!
If any collection agency has tried to contact you, this has also gone on your credit report. Collection agencies of course, are organizations that businesses and lenders report to when you haven’t paid a bill. Instead of pursuing the action themselves, the company will hand your account over to a collection agency, and give them a percentage of your payment for collecting the amount due. These agencies will then start to contact you and once they do, you can be sure that your credit report has now been marred.
Account history for any type of credit cards or other loans will also be on your credit report. This will include how long you’ve held the debt or loan for, your payment history on it, any and all payments missed, as well as other important information regarding that account, such as when it was opened and if you’ve closed it.
The number of inquiries for your credit report will also affect your credit report – this is the number of times that someone has asked for it. Each time someone tries to obtain a copy of your credit report, it’s called a “hard hit,” and it’s an indication that you are trying to apply for more credit – and that looks bad to lenders and creditors. However, when you request a copy of your own credit record, this is considered to be a “soft hit” and it does not count against your credit score.
The type of credit you are using will also influence your credit score – whether you have a loan out, owe a utility company money, or have a personal loan balance. Some of these factors are more important than others with your payment history, bankruptcy declarations, and outstanding credit balances being the most important.
Fortunately, most items don’t remain on your credit report forever, meaning that as time passes, some items will just drop off your report – whether you’ve paid them off or not. Tomorrow, we’ll look at those items and how long they take to disappear from your history altogether – as well as which items will never go away.
